TieCon East Panel - Lagging Innovation of Web 2.0 Business Models

Last Friday I had the pleasure of speaking on a panel at Tiecon East (thanks to Raj Bala) with Fred Wilson, Don Dodge, Nabeel Hyatt, and David Cancel. The topic was “Web 2.0, viable business model or bust?” and we spent a lot of time discussing developing business models, current state of funding market, and whether or not we are in a bubble. As with any panel I always think of more things I wish I would have had a chance to say in the panel, but didn’t have time for. Thus I will be writing a few blog posts on it. I wanted to take a chance to write a few blog posts recapping the panel and expanding on some thoughts.

While I’m surprised we are still discussing the question of, whether or not we are in a bubble, it seemed there were many entrepreneurs still thinking about this topic. Let me first start out by saying that I am a firm believer that we are not in a bubble similar to web 1.0 days. Will there be losers? Absolutely. Probably more losers then winners. That’s the nature of business and market economics. But there are a few points that I think are really important to understand.

Bubble conditions = capital input > market opportunity

Don Dodge put it best by saying that you have bubble conditions when the capital input outweighs the market opportunity for that company. In other words, a company that could be a $30 million dollar business takes $20 million from VC’s that are looking for 10x return. While we may be seeing this a little bit, we certainly aren’t seeing this to the extent we did in the late 90’s.

But an issues currently is that many web 2.0 companies could very well be a solid $25 - $50 million dollar companies, but the current economics around venture capital are have been slow to adapt and do not mesh well with this state of the market. I commend Fred Wilson for being one of the more progressive VC’s to recognize this and act on it.

Many web 2.0 entrepreneurs are seeking the wrong type of capital input

A lot of entrepreneurs get frustrated because they seek a traditional VC round when they shouldn’t be! My guess is that over half of the companies that are pitched to VC’s just don’t fit the traditional VC model. But many could still be solid smaller companies that can be built with starting on a $250K - $1 million dollars of funding. My best advice to entrepreneurs is to take a hard honest look in the mirror and ask yourself if your business can really be a $100+ million company, and if the answer is no don’t waste your time on a traditional VC round. Seek out angels and investors such as Fred Wilson.

Innovation in technology has outpaced the innovation in monetization for those technologies

I have to give some partial credit to my good friend and fellow entrepreneur Chris Keller for this insight. But one of the reasons that we are seeing a lack of revenue from Web 2.0 companies is that innovation around technology and good consumer internet ideas has outpaced the innovation of monetization and business models. In fact, this is quiet normal and is a natural cycle.

Now that the funding and acquisition markets are tightening a bit, a lot of web 2.0 entrepreneurs will be forced to refocus their efforts from how to just get eyeballs, but how to make money to sustain their companies. These efforts will produce new viable business models and the innovation in monetization will catch up to the innovation in technology. After that, the cycle will repeat itself.